Analysis: Fines likely if ERCOT retirements result in blackouts

The North American Electric Reliability Corp levied $278,000 in penalties on Texas entities following the rolling blackouts imposed during the extreme cold snap of February 2011, but the consequences would likely be much heavier if another rolling blackout results from planned retirements.

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In early February 2011, extreme cold caused 210 generators in the Electric Reliability Council of Texas to either derate, trip offline or fail to start, which prompted ERCOT to impose a controlled load shed of 4,000 MW, affecting about 3.2 million customers, according to the incident's final report by the staff of NERC and the Federal Energy Regulatory Commission.

"NERC can and does impose monetary and non-monetary penalties in connection with violations of mandatory, enforceable Reliability Standards," NERC spokesman Marty Coyne said in an email Friday. "Load shedding may or may not be the result of a violation of a Reliability Standard. Where it isn't, no penalty would apply."

NERC's cold-snap-related penalties were often about not following ERCOT directives to shed load or keep a generator operating during the emergency.

Since then, ERCOT has been described as too long on generation supply, as surging wind generation development has coincided with low natural gas prices, suppressing power prices.

But in September and October, generation owners announced plans to retire 4,618 MW of generation by early 2018.

On Friday, ERCOT announced that it has determined that the largest of these plants, the 1,800-MW Monticello coal plant in northeastern Texas, is not needed to maintain transmission system reliability and can therefore retire as planned by January 4.

On Thursday, ERCOT made the same announcement about the smallest of the plants, the city of Garland's natural gas-fired Spencer 4 and 5 units totaling 118 MW. Garland plans to shut the plant on January 3.

ERCOT had previously made a similar announcement about the gas-fired 300-MW Barney Davis Unit 1 near Corpus Christi, Texas, which Talen Energy has said it plans to retire by December 31.

And Beth Garza, who heads Potomac Economics' independent market monitor effort at the Electric Reliability Council of Texas, said Friday she thinks the 470-MW Gibbons Creek plant, northwest of Houston, which was mothballed this month, will probably retire, rather than restart.

The exit of all those plants next summer would subtract almost 5,100 MW of capacity from the 84,420 MW of capacity counted in ERCOT's latest Capacity, Demand and Reserves Report in the summer of 2018, bringing the total down to 79,332 MW. That CDR projected demand in the summer of 2018 to peak at 71,012 MW, leaving 8,320 MW for reserves.

If next summer has typical forced and maintenance outages totaling 3,420 MW -- similar to what ERCOT's final Seasonal Assessment of Resource Adequacy forecast for the summer of 2017 -- combined with 3,693 MW of extra load associated with heat similar to 2011 and extremely low wind output, dropping that capacity by 3,035 MW, that would leave ERCOT with 1,828 MW more demand than supply.

In such extreme circumstances, ERCOT would likely implement emergency procedures, which could include planned load shedding, to maintain the integrity of the remainder of the grid.

"Anticipated planning reserves are likely to fluctuate in the coming years, just as they have in the past when the ERCOT market experiences cycles of new investments and retirements of aging resources," ERCOT spokeswoman Robbie Searcy said Friday. "As always, ERCOT will take the steps necessary to maintain a reliable system."

A person familiar with NERC rules who asked to remain unidentified said that if power market participants violated standards related to rolling blackouts today similar to what happened in February 2011, "there would be much higher penalties."

In February 2011, NERC was still developing "parameters on how to evaluate risk," the person said, but NERC now uses a "big penalty calculator spreadsheet" such that the higher-risk events result in "much higher penalties."

Another factor to consider is that the cost of mitigation measures negotiated with NERC over standard violations could be more -- perhaps much more -- than any penalty levied, the person said.

ERCOT's Searcy said her organization has anticipated "some unit retirements, and we will continue to evaluate impacts to the system associated with the removal of these units," and if they are needed, reliability-must-run agreements could be negotiated.

However, ERCOT protocols only allow the grid operator to contract with a unit in a reliability-must-run basis to cover its costs "to prevent an anticipated Emergency Condition relating to serving Load in the current or next Season."

Dana Lazarus, senior analyst for North American power at S&P Global PIRA, said Friday that while the retired units would be ineligible for an RMR agreement, ERCOT could contract to restart mothballed units.

At the ERCOT board of directors meeting, board member Peter Cramton, a University of Maryland economics professor, said, "Now is the time for us to let the market work," adding that forward prices would rise, signaling a need for market entry.

ERCOT Houston Hub on-peak August packages have climbed about 44% to the low $90s/MWh since the start of October, while ERCOT West Hub on-peak July packages have risen nearly 60% to the low $60s/MWh.

But Lazarus said, "Based on current forward prices, I do not expect that current price expectations are high enough to incent new generation or the return of mothballed of units for summer 2018." With the coal and gas retirements, plus expectations for delayed commercial operations dates for a number of planned ERCOT resources, Lazarus has estimated that ERCOT's planning reserve margin would be in the range of 10% to 11% for the summer of 2018 and 9% to 10% for summer 2019.

ERCOT has a target reserve margin of 13.75%, designed to ensure that a lack of capacity causes a blackout no more than once in 10 years.